Presented to the Portfolio Committee for Trade and Industry

23 March 2005

COSATU Parliamentary Office

Introduction and context

COSATU welcomes the opportunity to comment on the Cooperatives Bill, hereafter referred to as "the Bill". It has been a very long process to finally have a Bill tabled. As the Committee may well know, the process of formulating policy and legislation on co-operatives dates back to around 2001, when the Draft Co-operatives Bill was tabled by the Department of Agriculture.

We have moved a long way since then, and there has been a reasonable amount of consultation with the Department of Trade and Industry at a NEDLAC level, but around the policy framework and not on this version of the draft Bill. In this regard, we would like to express our concern that changes made to the Bill have been made recently without comment and consultation with NEDLAC stakeholders.

With respect to the honourable members of the Committee, we believe that the timing and period for public hearings has been less than ideal. Whilst there was substantial advertisement for these hearings in the regular newspapers, the hearings overlapped with the dti’s National Cooperatives Consultative Conference on the 14th and 15th of March 2005 in Johannesburg, attended by more than 300 representatives from a range of organisations.

Most community based organizations were in attendance at this Conference. It may explain why the potentially valuable inputs that could have been brought to these hearings by these organizations did not happen. In light of the above, we strongly urge that further engagement from the public be considered before the Committee finalise and complete their deliberations on this important Bill and that a final round of engagement happens at NEDLAC with NEDLAC stakeholders to address some of the concerns raised in this submission.

In South Africa, there is clearly broad support for co-operatives. A recent dti conference was informative insofar as the extent of co-operative support by government, international organizations including the ILO and International Co-operative Association (ICA), and the several insights gleaned from NEDLAC study tours conducted last year to Italy, Kenya, Spain and Japan.

Co-operatives are important to COSATU for a range of reasons. We have a detailed list of resolutions on co-operatives from our 8th National Congress of 2003. We believe that it will, amongst other:

In this regard, it is imperative for the State to provide support so as to nurture and support the establishment of existing and new co-operatives, in a manner that does not stifle its potential with overregulation, or leave it unassisted.

Moreover, it remains imperative that the role of co-operatives should not only be relegated to the so-called ‘second economy’ and be viewed as a crutch to address the failings of capitalism that has seen unprecedented inequitable wealth accumulation both locally and globally. International evidence, in particular from countries visited by the NEDLAC study tour is that co-operatives contributes significantly towards those countries’ GDP and in some cases even rival the performance of companies.

COSATU therefore remains concerned by statements of the Minister where emphasis was placed on the role of co-operatives for the ‘second economy’. Of concern is the statement that "government therefore envisages an enhanced role for co-operatives in addressing the issue of support to the second economy as well as increasing the participation of poor people in our economy".

The dti’s policy on development of co-operatives aims to support emergent and new forms of co-operatives. At the same conference, the Minister of Trade and Industry referred to some kinds of support measures being developed and to be "presented at NEDLAC and to other stakeholders in the near future". These support measures include "some of the SMME support mechanisms to provide assistance to co-operatives". However, the Minister pointed out the need for "additional forms of support", that include Broad Based Black Economic Empowerment legislation and processes, and "enterprise development activities that come out of the implementation of the sector charters", such as forming "part of supply chains,…promote them moving up the value chain".

Other forms of support include the dti Co-operatives Unit "implementing an education campaign, forming partnerships, lobbying organisations, and promot[ing] the co-operatives sector as a viable alternative form of enterprise. Specifically he mentioned that the "education campaign is looking at conducting training in co-operative principles and practices at all appropriate levels of the national education and training system" and are in the process of "accrediting some of the [training] manuals with the SETAs. Whilst these support mechanisms are welcomed, it should be explicitly outlined in the Bill.

A summary of our previous key concerns and recommendations

During the initial submission of the Draft Co-operatives Bill in 2001, we raised the following recommendations, which we believe still has a bearing on the current context:

Overall, there needs to be an alignment of the Cooperatives Bill and the Cooperatives Banks Bill. The Cooperatives Bill requires financial cooperatives to register under the Banks Act and not the proposed Cooperatives Banks Bill. Furthermore, appendix 2 of the Cooperatives Bill provides for further regulation of Financial Cooperatives over and above what would be required through the Cooperatives Banks Bill.

Clarity and alignment are required by the two departments as to who will have responsibility for what. Each should have this only specified in their proposed legislation (whilst making cross referencing if necessary). It is generally accepted the Cooperatives Bill will enable the financial cooperatives gain legal form and structure, whilst the Registrar of Cooperatives will regulate and supervise prudential standards and regulations.

Overall comments on the Co-operatives Bill [B4-2005]

COSATU broadly supports the Bill. The 13 Chapters and 2 schedules contained in the Bill in its current form were considered at length and informed by the Co-operative Development Policy Framework.

The Act aims above all to permit co-ops to register so that they gain a legal persona so that the State can identify them in order to provide support (though the extent and specific kind of support is not detailed). The Act essentially fulfills these aims, providing a first step toward building a co-op movement.

We do believe however that several aspects contained in the Bill were not discussed, negotiated and finalised at NEDLAC and therefore would like to draw the attention of these aspects to the Committee and propose that a final meeting at NEDLAC be held before deliberating further on it. Specifically these include:

Finally, the request by various stakeholders, particularly those of organised business and large co-operatives claiming that special consideration be given to the practice that "votes proportional to the volume of the product contribution be allowed to continue in co-operatives" are outrageous and should be banned. These practices directly contravenes the principle of democratic member control (through one member-one vote), which is a fundamental co-operative principle.

COSATU believes that this would violate the provisions of this Bill, in particular the definition of "co-operative principles" and the objects of the Bill, including the fact that any consideration of this request will entrench economic inequality. These requests are best accommodated in company law, requiring co-operatives engaging in these problematic practices to convert to companies. These practices must also be investigated by the Registrar of Co-operatives.

Different types of co-operatives – requires different support and approaches

Clearly the different types of co-ops will have different needs and face different challenges. In particular, the Bill must recognize the fundamental difference in the internal structures and operational requirements of the financial – and consumer - , on the one hand, and producer co-operatives on the other.

In essence, the financial and consumer co-ops provide services to members at a lower cost and more convenient locations, whereas producer co-ops produce goods for the market. Within the South Africa context, the former include funeral and housing co-ops. Financial and consumer co-operatives often have thousands of members from the start, whilst producer co-operatives require special measures to protect members’ deposits, which should be provided through the Co-operative Banks Bill.

We are of the view that, the Bill overemphasizes regulatory provisions, without clear elements of support mechanisms by the State; and adopts a "one size fits all" approach on certain aspects – notably the detailed provisions on the constitution. As a result, it does not adequately address the diversity of challenges and needs of the co-operative movement.

Current shortcomings in the Bill requiring attention

The Bill is tabled within a hostile South African environment where markets and rules are not used to, or geared towards interacting with co-ops. There is also a lack of understanding amongst the public about co-operatives.

With the above concerns in mind, COSATU is concerned that the legislation, whilst providing detailed regulatory provisions, the legislation is inadequately enabling with regards to the minimum support measures to be provided by the State. It is therefore very hard for small, emerging and largely primary co-operatives to obtain a legal persona, for the following reasons:

1. The registration processes in our view are still designed only for large,

formal, agricultural cooperatives. This constraint also applies to

secondary and tertiary co-operatives, such as financial co-operatives.

Using this specific type of co-operative, it would be difficult, expensive

and tedious to comply to both the Registrar of Co-operatives, as well

as to comply with criteria determined by the Banks Act of 1990; and

where applicable, with the Long-term Insurance Act of 1998; the Short-

term Insurance Act of 1998 and the Medical Schemes Act of 1998.

Similar constraints may apply to other types of co-operatives as well.

  1. Given the dualistic nature of the South African economy, where the majority still remains excluded from the formal economy, there should be an acknowledgement of the positive role that co-operatives can play in promoting access, and in particular that the principles of democratic decision-making and the equitable division of surplus would contribute significantly and uniquely towards economic equity, the reduction in the income gaps and genuine broad-based black economic empowerment. We proposed that this should be contained within the preamble as well as the objects of the Bill (see specific recommendations).
  2. Furthermore, the dti asserts problematically that, in terms of co-operative support, "the linkage with micro-credit organisations would be a focus of attention. Financing of enterprises including co-ops would commence in March 2005, initially by using existing structures until own ones were established. They [dti] were aiming at helping one hundred co-ops during 2005 with grants for initial capacity building and financing. For mass consultation they had had to work through chief stakeholders such as NEDLAC, trade unions, the South African Communist Party and the agricultural sector. They still needed active consultation with traditional leaders". These and other statements are worrisome, since it was not mentioned at a NEDLAC level and details are still forthcoming. It is not clear whether the micro-credit organizations referred to here are public sector entities that are meant to provide support at low-interest level, or private sector micro-credit organizations that have exploited poor communities with highly exploitative interest rates – this should be clarified. Given these contradictions, the Bill should do more to ensure support for co-operatives, rather than just enabling legislation.

    First, there is no reference to an appropriate tax regime, given that co-ops are non-profit organizations. Importantly, the surplus made by the co-operative goes beyond investment needs, but instead to members’ incomes. Often a percentage of the distribution of surplus is the sole or major source of income of certain types of co-operatives (such as worker co-operatives) or emerging co-operatives. If the appropriate tax regime is to be exclusively dealt with in a money bill, the Taxation Laws Amendment Bill of 2005 would be the appropriate legislative instrument. At the least, the Bill should recommend an appropriate tax regime for co-operatives. The Bill should define co-operatives as not for profit unless they retain a surplus for use other than reserves and investment.

    Second, explicit provisions are necessary to require the Department of Labour to monitor the impact of the Bill to ensure that it is not used as a mechanism by employers to outsource so-called "non-core activities" with the underlying objective being to undermine and evade compliance with labour law obligations.

    Third, there is currently a lack of targeted support measures within the Bill. The only support measures mentioned in the Bill are as follows:

    COSATU contends that specific support mechanisms should be listed in the Bill. It would ensure a close working relationship between the dti Co-operatives Unit, and the Co-operatives Advisory Board.

    1. In an effort to support co-operatives in a manner that is holistic and integrated, we recommended at NEDLAC that the dti should at least have to report regularly to Parliament on its efforts. There is no such provision contained in the current version of the Bill.
    2. Overall, the structure and language of the Bill requires some reworking. We propose that some editing can be done to make it accessible to majority. The Act should have separate requirements for primary, secondary and tertiary co-ops. Current provisions that combine requirements for all three these types make it difficult and cumbersome to read and interpret.
    3. Over-regulation - the Bill seeks to impose specific structures and procedures through the requirements for the Constitution and the legislation, rather than leaving it to members, where appropriate. This can have negative consequences. It is harder for emerging co-operatives to define their constitution and may lead to disempowerment of members, resulting in the co-operatives remaining unregistered.
    4. COSATU is of the view that the Bill tends to copy company law too much. This is not helpful, especially given the fact that co-operatives have very different requirements. Whilst company law seeks to protect shareholders from management and lays down very specific requirements for operations, co-operative law should seek to empower members to control management and co-operative operations directly. The real analogy then is with law on membership-based organisations, like unions and existing progressive co-operatives to advise on how, for example constitutions are collectively shaped.
    5. The main protections for members in democratic organisations are a

      constitution that ensure democratic procedures and structures; and the active and regular engagement of its members. Thus, the Labour Relations Act, for example, does not impose detailed requirements to ensure union democracy. It is, above all the members’ responsibility.

      It would be better to give the Registrar more discretion in defining when

      a co-operative’s constitution is democratic, with clear criteria and

      routes of appeal, rather than prescribe the format, content and criteria

      in a Bill.

    6. The section dealing with the Board of Directors should be reviewed as much of it is overly prescriptive. In particular, individual co-ops should be free to define appropriate oversight and management structures through their Constitutions. It is not clear whether, this requirement,viz. to have a board of directors then excludes very small producer co-ops, for example, from registering, if they do not have a formal Board.
    7. The section on audits in Chapter 7 of the Bill is confusing because it starts with blanket requirements and only notes exemptions at the end. We recommend that it would be better to lay out the general rules first, and then give details on audit requirements. The Bill acknowledges that the cost implications for a full audit on a small co-operative are prohibitive and appropriate exemptions are made. It points to the need for education, training and support by the State in this regard to maximize compliance by co-operatives. The general rule should be that large, formal co-ops must have annual audits, whilst other co-ops must keep financial statements but do not need an annual audit if the Registrar agrees. We need to ensure appropriate audit practices and rules for co-ops, since they have special requirements for instance with regard to the treatment of reserves.




    Overall recommendations

    Whilst we welcome and endorse most of the provisions of the Bill, we are of the view that there is a need to reduce regulatory burdens for establishing and registering a co-operative, as outlined above.

    A framework should be added for departments to provide greater support for co-operatives. There should be a requirement that every department report to its portfolio committee annually on efforts to support the co-ops movement and their impact. Specifically, the Treasury, Departments of Trade & Industry, Labour, Agriculture, Communications, Transport and Tourism should be required to develop and report on programmes to support co-ops in their sectors.

    The issue of the definition of "minister" in the Bill needs to be amended to reflect the wording in the Companies Act, which effectively recognises the position that insolvency, liquidation, winding up and judicial management remain the line function of the Justice Department as has been historically the case. While there is currently a contestation between the dti and the Department of Justice as to where future responsibility should lie, it would make sense for the Bill to at least reflect the status quo and not be inconsistent with similar provisions in comparative legislation. Settling where this responsibility lies is a broader matter and lies ultimately with government, but is inappropriate to be settled within the context of this Bill, which is a process limited only to co-operatives.

    Provisions are necessary to define the non-profit nature of co-ops for tax

    purposes. In this regard, recommendations need to be tabled and considered for the Taxation Laws Amendment Bill for 2005, prior to this Bill being enacted.

    Specific comments:


    Whilst COSATU remains broadly supportive of the Bill, in light of the concerns raised above, we call on the Portfolio Committee for Trade and Industry to request that the Bill be considered for a final round of consultation at NEDLAC. These concerns we believe are substantial and warrant this intervention.